Blanchett v Mowbray
[2013] NZHC 2797
•24 October 2013
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2010-419-1584 [2013] NZHC 2797
UNDER the Companies Act 1993
IN THE MATTER of the liquidation of Hori Limited (in liquidation)
BETWEEN DAVID MURRAY BLANCHETT and
COLIN THOMAS McCLOY as
liquidators of Hori Limited (in liquidation) Applicants
ANDSTEPHEN HOPE MOWBRAY and PAREKURA SMITH MOWBRAY Respondents
Hearing: 18 October 2013
Counsel: MD Branch and SJ Rawcliffe for applicants
CB Hirschfeld for respondents
Judgment: 24 October 2013
JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application to set aside transactions]
This judgment was delivered by me on 24 October 2013 at 3pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Harkness Henry, Hamilton
Enterprise Law, Auckland (M Taia)
BLANCHETT v MOWBRAY [2013] NZHC 2797 [24 October 2013]
The application
[1] The applicants apply for judgment against the respondent for $29,362, plus interest and costs.
The grounds relied upon in support
[2] The application is made in reliance on the following:
(a) Notices to set aside voidable transactions were served on the respondents, Parekura Mowbray on 10 May 2013 and Stephen Mowbray on 13 May 2013, in accordance with ss 292 and 294 of the Companies Act 1993;
(b)Neither respondent served a notice of objection on the applicants within the timeframe prescribed by s 294 of the Companies Act 1993. That time expired on 10 June 2013 for Parekura Mowbray and
11 June 2013 for Stephen Mowbray.
[3] The applicants claim that as no notice of objection was served by either respondent the transactions, set out below, were set aside on 11 June 2013.
(a) Payment of $4,500 on 24 December 2008 (b) Payment of $4,500 on 20 February 2009 (c) Payment of $4,500 on 27 March 2009
(d) Payment of $2,200 on 1 May 2009 (e) Payment of $1,652 on 2 June 2009 (f) Payment of $2,170 on 26 June 2009
(g) Payment of $4,340 on 24 December 2009 (h) Payment of $5,500 on 4 May 2010
[4] The applicants claim that the respondents are liable to pay the applicants the sum of $29,362, plus interest and costs in accordance with ss 294 and 295(1)(a) and (c) of the Companies Act 1993.
The opposition
[5] The respondents oppose the application and rely on s 296(3) of the Companies Act 1993. They say that they received each of the payments in good faith. They also say that a reasonable person would not suspect and could not have had reasonable grounds for suspecting that Hori Ltd was, or would become, insolvent. They say that they gave value for the payments received, or they have altered their position in the reasonably held belief that the payments to them were valid and would not be set aside.
Evidence admitted by consent
[6] In addition to the affidavits filed, counsel consented to my receiving as evidence the typed document headed Polly and Steve Mowbray to say. Accordingly, I include that document in the evidence to be considered.
Background
[7] In 2007, Jason Shane Paama and Karin Paama together approached the respondents for a loan. They are the son-in-law and daughter of the respondents. The loan was to set up a business called Eventscape. It related to venue seating at the Hamilton 400 V8 supercar street race. That took place annually for seven years, commencing in 2008 during April/May.
[8] In July 2007, the respondents obtained a loan and gave their property at
53 Boundary Road, Blockhouse Bay, Auckland as security. The amount of the loan was $260,000. They then loaned those funds to their son-in-law and daughter on the understanding that they would make repayments on a monthly basis in respect of the respondents’ loan obligation to the respondents’ bank. The payments that are listed in [3] are the payments that were made by Hori Ltd to the respondents’ bank.
[9] The respondents’ son-in-law and daughter could no longer afford to make the payments after 4 May 2010 so the respondents had to try to make the payments themselves. In or about September 2011, the respondents separated as a couple. They decided to sell the property that was the security for the loan and to split the net proceeds equally. Once the property was sold all the loans were repaid, including the balance owing to the bank.
[10] Hori Ltd was put into liquidation of 14 March 2011 by order of the High Court at Hamilton. The applicants were appointed its liquidators. The statement of claim seeking the placement of the company into liquidation was filed on
30 November 2010.
[11] The applicant liquidators issued a notice to set aside those transactions in the respondents’ joint names. The notices were served on both respondents respectively on 10 and 13 May 2013. Neither served an objection within the required timeframe, prescribed by s 294 of the Companies Act 1993. As a result, the transactions were set aside.
[12] The respondents say that when the moneys were received they were acting in good faith in receiving those payments. They say they had no reasonable grounds for suspecting that when the payments were made by Hori Ltd that it was insolvent or would become insolvent. They say that the moneys were received for the purpose of repaying the loan. They had no idea that the payments would be set aside or would otherwise be invalid.
The issued by this application
[13] The issue raised in this application is whether the respondents have a defence under s 296(3) of the Companies Act 1993 to the application for judgment.
[14] Section 296(3) of the Companies Act 1993 provides:
296 Additional provisions relating to setting aside transactions and charges
…
(3) A court must not order the recovery of property of a company (or its equivalent value) by a liquidator, whether under this Act, any other enactment, or in law or in equity, if the person from whom recovery is sought (A) proves that when A received the property—
(a) A acted in good faith; and
(b) a reasonable person in A's position would not have suspected, and A did not have reasonable grounds for suspecting, that the company was, or would become, insolvent; and
(c) A gave value for the property or altered A's position in the reasonably held belief that the transfer of the property to A was valid and would not be set aside.
[15] Counsel for the liquidators advise that the liquidators have no evidence that the respondents did not act in good faith, or that they suspected insolvency. Accordingly, s 296(3)(a) and (b) of the Companies Act 1993 are not in issue. The sole issue is whether the respondents have given value for the payments received or, alternatively, have altered their position in the reasonably held belief that the transfer of the property was valid and would not be set aside.
[16] Counsel were in agreement that the onus of proof of the matters prescribed in s 296(3) of the Companies Act 1993 rests with the respondents.1 For that reason, Mr Hirschfeld for the respondents addressed the court first.
[17] All the requirements of s 296(3) are to be treated cumulatively.2
[18] It is necessary to determine whether the respondents either: (a) Gave value for the payments made;
Or
1 Grant v Shears and Mac Ltd [2012] NZHC 1772.
2 Farrell v Fences & Kerbs Ltd [2013] NZCA 91, [2013] 3 NZLR 82 at [86].
(b)Altered their position in the reasonably held belief that the payments were valid and would not be set aside.
Did the respondents give value for the payments made?
[19] Ms Rawcliffe referred to the leading authority, the Court of Appeal decision in Farrell v Fences & Kerbs Ltd which deals with the issue of “gave value”.3 The court said:4
… the giving of value must be proved to have occurred at that time and does not include value given to the company at the time the antecedent debt was created.
In its final judgment the Court of Appeal dealt with the position of a forebearance to sue as follows:5
[40] This Court summarised the purpose of s 292 in Anzani Investments
Ltd v The Official Assignee:
[6] The purpose of s 292 is to provide a mechanism that enables a liquidator to restore valuable consideration (of various types), with which the company parted prior to liquidation, to the pool of assets available for distribution among all creditors. The object is to prevent one creditor from being given preferential treatment through payment (pre-liquidation) of an amount in excess of that which would have been received had it participated with other creditors of equal rank in the distribution of the proceeds of sale of assets on liquidation. Those general principles are qualified by limited exceptions contained in s 292.
[41] Under the 1993 Act as first enacted the creditor still had to demonstrate detriment in the sense described in MacMillan Builders Ltd (in liq) v Morningside Industries Ltd.
[42] The voidable charge provision carried forward the exception for monies actually advanced or paid or the price or value of the property sold or supplied to the insolvent company or any other valuable consideration given in good faith by the grantee of the charge at the time of or at any time after, the giving of the charge.
[43] Section 296(3) continued the pre-existing s 311A(7) in substantially similar form:
(3) Recovery by the liquidator of property or its equivalent value, whether under section 295 of this Act or any other section of this Act, or under any other enactment, or in equity or otherwise, may be denied wholly or in part if—
3 Ibid.
4 Ibid, at [86].
(a) The person from whom recovery is sought received the property in good faith and has altered his or her position in the reasonably held belief that the transfer to that person was validly made and would not be set aside; and
(b) In the opinion of the Court, it is inequitable to order recovery or recovery in full.
[44] In 2001 the Ministry of Economic Development issued a discussion document as part of a review of insolvency law.24 For present purposes, the key proposals were:
Consideration should be given to the feasibility of replacing all the current voidable transaction provisions with a single provision that would apply regardless of the nature of the transaction, the intention, knowledge or motive of the debtor or recipient of the transaction or whether the debtor was an individual or a company.
The “ordinary course of business” exception in s 292 of the Companies Act would be replaced with a test that considered the net effect of a series of transactions based on a United States model. Reference was also made to the “running account” principle established under Australian corporations law.
The existing defence under s 296(3) of the Act would be retained. [Citations omitted]
[20] The Court of Appeal concluded that the release of an antecedent debt on receipt of the payment did not qualify as “value” in terms of s 296(3)(c).
[21] When I apply that statement of principle to this case, it is necessary to see if there is any new value given at the time, or close to the time, when the payments which were set aside were received. Mr Hirschfeld properly acknowledged that it was difficult to apply this part of the section to his clients’ case. Indeed, on the facts, there is one answer only, namely, that the payments were made to satisfy the antecedent debt. They were not made to discharge some new obligation incurred at about the time the payments were made.
[22] Accordingly, I conclude that this part of s 296(3) does not apply and does not assist the respondents.
Have the respondents altered their position in the reasonably held belief that the payments on their behalf were valid and were not to be set aside?
[23] In Baker Timber Supplies v Apollo Building Associates (Tauranga) Society
Ltd (in liquidation) Fisher J had to consider the corresponding provision in s 311A(7)
of the Companies Act 1955.6 The inquiry directed by that section was that the party:
… has altered his position in the reasonably held belief that the transfer or
payment of the property to him was validly made and would not be set aside
The judge noted that the main purpose of the section:
... is to assist a creditor if he has deliberately gone down one path in the reasonable expectation that he has received a valid payment, only to find that he is not only required to repay the money but that in the meantime he has also lost a valuable alternative opportunity. In other words, he must have acted to his detriment on the strength of the insolvent company's payment.
Later, his Honour added:
I do not think it sufficient for a creditor simply to rely upon its injection of the relevant funds into its working capital, with or without reduction of its outstanding overdraft. In this case there is no satisfactory evidence of any conscious or deliberate decision to embark upon a course of action or refrain from an action in reliance upon the payment. There is no suggestion that because of the payment the applicant would now be unfairly denied the opportunity to take up a course which, without payment, would not have been pursued or would have been available as the case may be.
[24] In re Bee Jay Builders Ltd (in liquidation) Tipping J said:7
The essence of an alteration of position for present purposes seems to me to be a deliberate course of conduct, be it act or omission, following receipt of the impugned payment which course of conduct the recipient would not have undertaken but for receipt of the payment and belief in its validity.
[25] What the respondents have done here is to use the money to pay their existing debt commitment. That was a commitment they had regardless of whether the payment was received from Hori Ltd or not. They were contractually obliged to make the payments to the bank. That was a commitment they had, regardless of whether Hori Ltd satisfied its obligations to the respondents. Mr Hirschfeld invited me to read more into the section having regard to the fact this was essentially a family position where the respondents were assisting the shareholders of Hori Ltd,
who were respectively their son-in-law and daughter.
6 Baker Timber Supplies v Apollo Building Associates (Tauranga) Society Ltd (in liquidation)
(1990) 5 NZCLC 66,791 (HC) at 66,793.
7 re Bee Jay Builders Ltd (in liquidation) [1991] 3 NZLR 560 (HC) at 566.
[26] I am not satisfied that the section justifies that approach at all. The circumstances here are certainly unfortunate as far as the respondents are concerned. I have no doubt that their intention all along was simply to assist their daughter and son-in-law. The fact that they have advanced a large sum of money on an unsecured basis to Hori Ltd has left them as an unsecured creditor being owed a substantial sum of money, probably in excess of $260,000. None of that, however, justifies my making a finding that they have altered their position as a result of the reasonably held belief that the payments were valid and would not be set aside. There is just no basis for such a finding.
Conclusions
[27] Accordingly, I conclude that s 296(3) of the Companies Act 1993 does not provide a bar to my ordering the recovery of the voidable payments in this case to the liquidators.
[28] The liquidators also seek interest. I consider that interest should be payable at the Judicature Act rate from the date of liquidation, namely 14 March 2011.
Judgment
[29] Accordingly, judgment is entered against the respondents for $296,362 together with interest on that sum at the Judicature Act rate from 14 March 2011 to the date of this judgment.
Costs
[30] Counsel for the respondents quite properly advised that if I was to find in favour of the applicants that a claim for costs less than calculated on a Category 2
Band B basis would be made. Counsel invited me to reserve costs in the hope that counsel could agree the figure. That is appropriate in this case. Accordingly, costs are reserved with a view to the parties agreeing the appropriate quantum of costs. In the event that the parties are unable to agree, memoranda in support, opposition and reply shall be filed and served at five working day intervals. The file shall then be
referred by the Registrar to me for the completion of judgment for costs.
JA Faire
Associate Judge
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